Canada is Experiencing Record High Household Debt

There are far too many Canadians struggling to climb out of crippling credit card debt.

The amount of Canadian household debt has reached an unprecedented $1.94 trillion in the second quarter of 2016, up 5.1 per cent from this time last year, according to a recent study by RBC. 2015 saw household debt increase the fastest since 2011, but the outlook for the rest of year is even more worrisome due to the soaring price of housing.

Surprisingly, it’s not mortgage loans that are raising the biggest concerns, which make up around 70 per cent of the total debt, but rather consumer spending. Low interest rates are driving people to buy more, whether it be back-to-school shopping for their kids or buying a new car, they are doing so at a high rate that is spurring short-term gains in the economy, but mounting household debt could bring it to an abrupt halt in the near future if overall market gains do not continue as expected.

Low Interest Rates

Right now it’s cheaper than ever for Canadians to borrow money thanks to low interest rates, but lines of credit, personal loan debt have increased by 2.6 per cent year over year.

Laura Cooper, an economist at RBC, says consumer spending has been driving the economy since the 2008 recession, which occurred alongside increases in property asset value.

“The persistence of this slowing trend and any attendant wealth effect could have implications for the sustainability of the consumer to continue to drive economic activity, even in the absence of an adverse macroeconomic shock,” Cooper told the Toronto Star. “Should a shock materialize that leads to a housing market correction, the large run-up in household debt indicates a ‘more severe and longer-lasting’ decline in household consumption than would otherwise have been the case.”

A study by TransUnion found that the average Canadian owes around $21,500 in non-mortgage debt, which shows the varying levels of risk taken on by a range of borrowers if there were to be an economic downturn. However, it’s these households that face the greatest burden in the case of a spike in unemployment.

Private Lenders

If banks are the problem, private lenders are the safety net. The private lending industry has long been subject to stereotyping, but unjustly so.

Toronto-based Affirm Financial recognizes the popularity of credit cards as well as the financial strain they can pose. Since banks are becoming increasingly stringent on who they lend to, it’s leaving those with a poor credit score to look for alternate solutions to regaining financial freedom.

Affirm Financial offers an unsecure credit card, which means it doesn’t require a credit deposit and can receive up to $3,000 in credit. It has a higher interest rate, but it allows people to rebuild their credit score, which is essential if you don’t own adequate equity in your home and need a second mortgage loan from the bank in the future if unemployment occurs.

Thankfully, all-time high debt loads are being kept at bay due to low interest rates, but as the Canadian economy picks up steam, interest rates are expected to rise and make current household debt even more difficult to manage.